Having savings set aside in an emergency fund provides a great source of comfort should something unforeseen like job loss or illness happens. So how much should you set aside in your emergency fund, where should you keep it and when is the right time to access these funds?
A good rule of thumb is to have enough money for three months of expenses in your emergency account. The amount you set aside, however, will depend on your circumstances. The Henderson Poverty Line, the amount of money you need to get by each week, including how much you need to keep a roof over your head, is a good place to start to figure out how much you need to cover the basics in the event of an emergency. This is a benchmark that was first developed in 1973, which is now widely considered to be the benchmark for the disposable income Australians need to support themselves1.
These figures are a guide only, and your expenses are likely to be higher, so it’s worth looking at your actual expenses to figure out how much to set aside. You can do this by:
Once you know how much you’ve spent on these basic expenses you can work out how much you need to save in your emergency fund. It’s a good idea to add a contingency amount over and above this amount in case other expenses arise.
Now you’ve figured out how much to save in your emergency fund, it’s time to decide where to store these funds. Here are some options:
Once you’ve saved up your emergency money, it’s useful to put in place some guidelines about when to spend it. This is important as everyone has different ideas about what constitutes an emergency, depending on their views, as well as, their level of wealth. Here are some ideas:
If you decide to dip into your emergency savings for one of these or another reason, the idea is to spend the money on daily living expenses like food and bills. Emergency money isn’t usually for play money or for entertainment purposes. You can always set aside another pot of money for this purpose.
Emergency funds are a great way to give you a sense of financial confidence and the sense you will be able to meet your obligations through life’s ups and downs.
This information has been prepared by Westpac Banking Corporation ABN 33 007 457 141 AFSL & ACL 233714 (Westpac) and is current as at 29 June 2020.
The information in this article is general information only. It does not constitute any recommendation or financial product advice. It provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. The information has been prepared without taking into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. Before acting on it, you should seek independent financial and tax advice about its appropriateness to your objectives, financial situation and needs.
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